Seniors

October 3, 2014February 4, 2015

Should You Sell Your Pension for a Lump Sum or Insurer’s Annuity?

Pensions are becoming less popular with American employers—and many are choosing to offer their retirees and older workers lump sums or annuities in exchange for removing the pension obligation from their books. Why are companies moving away from this traditional retirement vehicle? Experts say it’s because pensions are so difficult to maintain. Frequent regulatory changes and rising Pension Benefit Guaranty Corp (PBGC) insurance premiums are playing a major role. Unfortunately, this has left numerous seniors with a difficult decision: should they take a lump sum or insurer’s annuity?

Insurer’s Annuity

With a traditional pension, the PBGC guarantees the benefits, protecting seniors in the event that their former employer goes bankrupt. With an annuity, the insurance company itself is the source of security. Should the insurer fail, the state guaranty association will step in, but coverage limits vary. According to the AARP, maximum lifetime coverage for insurer’s annuities range from $100,000 to $500,000 and are subject to the rules of your particular annuity product.

If you are considering selling your pension for an annuity, evaluate the financial health of the insurer. Credit ratings are important, and AM Best, Fitch, Moody’s, and Standard and Poor’s regularly rate insurance companies. Those considered superior score A+ or A++ ratings with AM Best and A, AA and AAA ratings with the other three. If the annuity offered is not through a highly rated insurer, you may want to pass.

Lump Sum

Lump sum pension buy-outs worry retiree advocates much more than insurer’s annuities do because it’s all too easy to make a bad investment or otherwise squander the money, leaving nothing for later years. If you’re considering a lump sum in exchange for your pension, The Pension Rights Center suggests you roll the money immediately into your IRA. This will keep the government from treating it like taxable income and facilitate further investment over impulse purchases.

Additionally, consider your health and life expectancy. Lump sum calculations rely on average life expectancies. If you’re health is poor and your spouse does not require survivor’s benefits, it can make sense to take a lump sum and enjoy the money now. However, if you beat the odds and live longer than expected, you may find that your retirement savings fall short as a result.

Whether your former employer is offering you a lump sum, an insurer’s annuity or a combination of the two in exchange for your pension, you may wish to contact a trusted financial advisor before making a decision. He or she can help you evaluate your current financial situation, interest rates, risk of inflation and other factors to choose the best option for you.

September 18, 2014February 4, 2015

Generating a Sustainable Retirement Income

According to the National Institute for Retirement Security, the average American has saved only $30,345 in a defined retirement account. Even if they invest it wisely, this is not enough savings to last them through their golden years—and it’s easy to see why the National Senior Citizens Law Center reports that more than 6.3 million seniors in the U.S. are living in poverty today. Fortunately, better advanced planning can help you generate a sustainable retirement income.

Determine your target income. What are your core retirement spending needs? They will include things like food, housing, healthcare and taxes. To cover these core expenses throughout your retirement, you’ll need an income that will increase with inflation. A financial planner can help you determine how much you’ll need to withdraw each month as well as the total investments you’ll reasonably need to generate those funds.

Don’t forget discretionary spending. What would make you happy in retirement? Perhaps you want to travel, join a country club or spoil your grandchildren. Whatever your desires, add at least 10 percent to your retirement savings to cover them. That way you can have some fun without jeopardizing your financial security.

Hold off on Social Security. Wait until you turn 70 to begin withdrawing your Social Security benefits, otherwise you’ll forfeit stacks of cash. You may have to tap other income sources while you wait, but that shouldn’t be a problem if you have adequate retirement investments. If you’re a married couple, the surviving spouse will keep the biggest Social Security payment regardless of who passes on first. It makes the most sense for the highest earner to delay his or her withdrawal.

Allocate your assets wisely. You need the right balance of stocks to other investments, and according to some financial analysts, holding too little can actually be more costly than holding too much. You’re going to need equities to sustain your retirement income so talk to your financial planner or investment advisor about how to navigate the stock market’s inevitable movements.

5. Include tax bracket considerations when planning. If you withdraw too much in a given year, you may find yourself pushed into a higher tax bracket. You’ll want to spread out your income to avoid significant losses in the form of taxes. For example, in 2014 a married couple filing jointly will pay only 10 percent in taxes on their first $18,150 in income. The tax rate increases to 15 percent for income from $18,151 to $73,800. Above that cutoff, the government will tax you at 25 percent.

Your financial planner can provide you with additional insight into these suggestions as well as other retirement income opportunities. Whether you fear your finances are not ready for retirement, or just want to review the plan you have in place, contact him or her today.

September 5, 2014February 4, 2015

Costly Medicare Mistakes to Avoid

More than 10,000 new people enter the Medicare program every day according to the AARP—and many of them either are misinformed or haven’t had the time to learn what to expect. Errors are common and can carry significant costs. Whether you’re a senior who is new to Medicare or you have been on the program for a while, consider these costly mistakes to avoid.

1. Don’t assume you don’t qualify for coverage.

You automatically qualify for Part B coverage (for doctors’ services, outpatient care and medical equipment) and Part D (for prescription drugs) if you’re 65 or older, a U.S. citizen or legal resident, and have lived in the states for at least five years.

Qualifying for Part A (hospital insurance) is a little more complicated. You must have earned at least 40 credits by paying payroll taxes over the course of your career, qualify under your spouse’s work record, or pay Part A premiums. Delaying Medicare sign-up until you’ve earned 40 credits on your own could result in permanent late charges.

2. Don’t assume you must be full retirement age before you sign up.

While full retirement age is now 66 for most people, you must sign up for Medicare when you turn 65 unless you have health insurance coverage through your employer or your spouse’s employer. If you don’t have that type of coverage and you delay your Medicare application, you’ll pay costly permanent late charges.

3. Don’t assume good health means you can skip Part D.

If you’re not currently taking any prescription drugs, you may be tempted to skip Medicare Part D. However, no one knows what the future holds, and you shouldn’t wait to buy prescription coverage until you actually need it. Go without and suffer an unforeseen illness or injury and you could pay thousands out of pocket.

4. Don’t assume you can only sign up for Medicare during “open enrollment.”

Open enrollment (from October 15 to December 7 each year) is only for current Medicare consumers who want to make changes to their coverage. If you’re turning 65, you will have your own enrollment period. If you have employer health coverage, you can delay signing up for Medicare. If you do not, you’ll need to enroll around your birthday. Miss that deadline and you’ll pay permanent late charges.

5. Don’t miss out on Medigap full protections.

Medigap is supplemental insurance you can purchase to cover a portion of traditional Medicare out-of-pocket expenses such as deductibles and copays. In order to benefit from full federal protection, you need to buy Medigap coverage within six months of enrolling in Part B. Do so and Medigap insurers won’t be able to deny coverage or charge a higher premium based on your current health or preexisting conditions.

6. Don’t neglect to check into programs that may lower your Medicare costs.

Premiums, deductibles and copays can all eat into your savings. If you retirement income is limited, you may qualify for a program that can reduce your costs. If you qualify for a Medicare Savings Program, your state will pay your Part B premiums. If you qualify for the federal Extra Help Program, you’ll get low-cost Part D prescription drug coverage.

Medicare insurance is complicated. If you need assistance understanding the requirements and potential costs of Medicare coverage, contact your insurance provider.